City home prices off - modestly

After several years of smartly increasing prices, the Philadelphia housing market is falling in line with the rest of the country and is starting to cool down.

That is the conclusion of Wharton housing economist Kevin Gillen, who released the results of a study yesterday showing that prices in the city declined about 1 percent in the third quarter, the first such drop since 2003. The study did not include sales outside the city.

Slightly fewer than 6,000 homes changed hands in the third quarter, the fewest sales since the third quarter of 2003.

Yet, in comparison with other hot housing markets, Philadelphia is far better off.

Gillen said Philadelphia's third-quarter decline was modest compared with price drops in Tampa, Fla., which year over year declined 10.1 percent, and Washington, where prices declined 7.2 percent during the same period.

"We were late to the boom, and now we are late to the bust," Gillen said. "I consider this more symbolically important. Housing prices [in Philadelphia] have doubled over the past five years."

Gillen said it was too soon to tell what the long-term trends would be. In comparison with other markets, Philadelphia may not be so volatile. Homeowners did not borrow quite as much on equity here as in other markets and thus were not as leveraged. Moreover, high-interest subprime mortgages and short-term speculation in residential real estate, a practice known as flipping, are far less in evidence.

Moreover, the market only started taking off here in 2004, well after other places.

Yet, he said that the city's underlying economics were cause for concern. High taxes and other costs, plus long-term population losses could weigh on the housing prices and make it more difficult to work off the growing inventory.

"Our long-term fundamentals remain very problematic; we are a very high-cost city," said Gillen, who besides his Wharton affiliation also is a vice president of Econsult, a city-based economic-consulting firm, which funded the study.

Gillen's study confirmed what Realtors have been saying since the summer: The city's housing market has been slowing down.

Heather Petrone, president of the Greater Philadelphia Association of Realtors and an associate at Joseph D. Petrone Real Estate, said the situation varied from one neighborhood to the next. She said that homes in the $250,000 range in the northwest part of the city, where she is based, have been moving steadily, but that buyers have been insisting on concessions, and sellers have been more willing to sit down and talk.

"This is a normalizing market, where you have give and take," she said.

Gillen's study, drawn from city housing data, showed declines in most city neighborhoods, but not all. University City showed the biggest third-quarter decline at 8.7 percent, followed by Kensington/Frankford at 5 percent, and Center City and Fairmount at 2.5 percent. But prices gained 2.3 percent in North Philadelphia and 1.1 percent in West Philadelphia.

Also in the third quarter, mortgage foreclosures in Philadelphia rose to more than 900 homes, about 50 percent higher than in 2005, Gillen said.

He said the steepness of the decline in University City was in part explained by the fact that the price appreciation there over the last five years was the highest in the city. Correspondingly, prices in North Philadelphia rose more slowly.

Yet, as the national housing bust grinds on, Philadelphia compares favorably with other major markets.

Gillen's study includes a chart showing the degree to which major housing markets are deemed overvalued or undervalued depending on prices, new construction, incomes, and other factors. Among cities that were deemed overvalued, Miami was at the top, with prices 58 percent above sustainable levels. Los Angeles ranked No. 2, with prices overvalued 51 percent.

Philadelphia was 11th on the list, also trailing Phoenix, Washington, Baltimore and other cities. Its prices were deemed about 14 percent overvalued.

Gillen said that, despite that finding, prices were relatively in line with the city's underlying economics. Moreover, prices may be overvalued in any given city, he said, but that does not mean they are likely to crash. They could simply plateau for a time, until incomes and other factors caught up.